For manufacturers times are tough. We blame government regulations, workers and unions for demanding too high wages, workers that are unskilled, electricity supply issues and unfair imports. But what if these are not the major cause of the problems we are experiencing. This article looks at how we use our raw materials and proposes that this is our number one cause.

1. What is ailing the South African Plastics Manufacturing
sector?
Hendrik Lourens
1. Plastics manufacturing in South Africa: a painful environment
Most managers involved in manufacturing know that times are tough.
Instinctively we know that what we have been doing up to now has not really
worked. For many of us in manufacturing our industry’s prospects look bleak.
Perhaps more important is that the fun seems to have gone out of work.
In journals, newspapers and amongst ourselves we lament the state of our
manufacturing industry and parade the usual suspects as causes: our workers
are unskilled, workers are too expensive, the government interferes too much
(legislation), the government interferes too little (import protection), banks do
not want to lend and administered cost increases are too high. Is it not
interesting that we managers see ourselves as blameless for the situation that
we inhabit? In the following sections, I will aim to show that reality is different
from that which we have come to believe, and that managers can change their
reality.
As a result of experiencing and observing all this unnecessary pain I
published an e-book on Amazon entitled, Drawing a New Map: Doing the right
things well through the application of Strategic Learning and Strategic
Alignment.1)
It is my hope that this will enable managers to identify the
problems in their systems, to gain the courage to act and thus to stem the tide
of job losses in manufacturing. In the book I show in detail the characteristics
of people that make it very difficult to adjust to changes, especially after a long
period of stability. By using real life stories I have tried to make the subject
simple to understand and easy to remember. It ends with practical
recommendations which I have seen result in dramatic improvements.
Where then is the pain coming from?
2. A business ecology developing in isolation
In the period 1980 to 2000, due to sanctions and disinvestment, capital and
skills in South Africa were channelled into many industries where they would
otherwise not have gone, and the business environment became isolated from
changes occurring in the rest of the world. Competition regressed to being
primarily amongst local companies. The competitive pressures forcing
improvement in the rest of the manufacturing world thus were prevented from

2. entering South Africa. As a result the manufacturing ecosystem developed to
match a reality that is no longer in existence. However, managers who grew
up during this period have developed a set of beliefs of what constitutes good
management (mental models of best practice), which are now out of sync with
the new reality
3. Imports are swamping local plastics manufacturers
Figure 1: Converted Plastics Items related imports into South Africa over the
last 9 years
Figure 1 shows the plastic-related imports and exports into South Africa.
These trends are true for steel, clothing and footwear as well as trade balance
in general.
4. Many South African manufacturers are uncompetitive
4.1 Managers are focussing on labour and stockholding costs at the expense
of raw material costs
Over the last 60 years new developments in technology have ensured that
direct labour costs (as a percentage of total costs) are no longer the greatest
cost component. In most manufacturing companies raw material makes up 60
‒ 80% of the total cost. Over a ten-year period, management thus has most
leverage over costs through reducing the amount of raw materials per widget.
It is this reality that is driving the continuing downgauging (making items
thinner) of products. You have either invested in the best technology and are

3. leading the downgauging process in you markets or your competitors have,
and are slowly driving you out of business.
Why are managers misdirecting their efforts? Reducing labour costs are
seen as a saving while buying new equipment is seen as a cost and not as an
investment. A common fallacy is that the cost of ownership of a new piece of
equipment is equivalent to the sticker price.
Studies in Germany have shown that the amortization cost of a new extruder
(five-year payoff period) makes up at most 10% of the yearly cost associated
with the machine. Direct labour and electricity make up about 10% and the
remaining 80% is due to raw material.
4.2 Investing in new equipment as the prime driver for reducing costs,
improving quality and providing customers with shorter reliable lead times
As managers we know that our production costs are too high when
compared to imports. But the biggest cost by far is raw-material related and so
while we focus on labour and stockholding, we are not winning. In fact many
smaller and medium-sized companies have no real asset life-cycle
replacement strategy. Even worse, equipment that is totally depreciated is
considered to be a plus.
A few companies in blown film extrusion have done extremely well by
understanding the importance of downgauging. They continued investing in
the most expensive German equipment available at a time when margins
were high. The industry standard used to be to use thirty-year-old single screw
extruders with thickness control capability of +- 15% for thin film applications.
These companies obtained three-layer coex machines able to do better than
+- 5% thickness control. The modern machines allow for much faster
changeovers with lower scrap generation per changeover. Three-layer modern
extruders allow them to use scrap in the centre layer with no quality penalty, to
use expansive value add metallocenes in small amounts in the outer layer for
superior performance, and to downgauge the thickness while maintaining
superior performance. The computerisation of controls also allows for much
better intrabatch and interbatch consistency.
4.3 Marginal costing as another cause of underinvestment
Marginal costing is a standard method used to evaluate investment
decisions. So let us say that we have 30% spare capacity. At the same time a
competitor plans to enter the market with a new technology that provides
performance improvements to the customer and efficiency savings to the
producer. The new company looks at zero income by not investing versus the
projected cash flow from the new investment. Should the incumbent be
looking at new equipment he looks at the upfront costs versus the unused
capacity in his factory.

4. 5. Why do managers find it so difficult to adjust to a change in the rules
of the game?
5.1) Human nature and management traps (we do not want to see the
changes)
We typically react to changes in our environment not by changing our beliefs,
mental models or behaviour but by using confirmation bias to filter the
information we receive. Due to the hierarchical nature of business, people
often cannot be truthful in their communication. The lower level is not allowed
to feed through to top what is not working in order to spare senior managers
embarrassment. People disagreeing with us get labelled as ‘uncooperative’,
‘difficult’, ‘antagonistic’. This is the classic ‘shooting the messenger’ routine.
Unconsciously we ensure that embarrassing issues become undiscussable
topics.
In this way we protect our world views and mental models and are able to
continue on the road to oblivion with our egos intact. As managers our self-
image requires that we be known as people who have all the answers; we
must look confident. Thus we do not allow dialogue around our viewpoint. We
may allow discussion as a debate, where we try to win. Dialogue, where all
get a chance to add their point of view and so create a more thorough
understanding, does not occur. These issues are part of what Chris Argyris
calls Management traps 1)
and are discussed in more detail in Drawing a New
Map.
J Edwards Deming maintained that managers can only properly manage if
they have developed a profound knowledge of the system under their control.
This includes knowing their customers’ choices, the limitations of current
equipment and what can be done with new equipment. Also, the impact on
cost, quality and lead time of new equipment. At this point the question is often
raised, “But how do we know that there is a market for the capacity of a new
machine?” About this Deming said: ‘But he that would run his company on
visible figures alone will in time have neither company nor figures’ 2)
and ‘The
most important figures that one needs for management are unknown or
unknowable.’ 3)
5.2) We have not created the environment in which we can identify the
changes
According to Dr Eliyahu Goldratt the ultimate constraint in a company is the
managerial span of attention. Every day is full of urgent items related to
customer issues. With old equipment, for the reasons noted (breakdowns,
quality, costs) these crises are much more intense than they need to be.
Let’s consider the past few years when companies were still generating
acceptable returns. If the focus in the average manufacturing company had
been on what customers were able to obtain from the best sources in the
world, critical investments would most likely have been made in time.

5. However, the average company board has been preoccupied with discussing
the problems related to current customer sales (firefighting). Key questions
such as: Who will be our customers in two years; who would we want to have
as customers and who will not be our customers and what will be the
significant needs of these customers? seldom featured. Moreover, the
following are questions that have not featured at all:
 Can our equipment satisfy the standards that will be required,
 What is the total cost of the quality of the equipment we are using and
what will the payback be to invest in new equipment?
 What are the likely costs of international producers and who may be
tempted to enter our markets?
5.3) Cause – time delay –effect
Humans are not good at identifying the leverage points in systems. The mind
is naturally drawn directly to those areas where stress is greatest, especially
with all the other pressures which abound in the business environment.
Actions are taken to relieve the immediate symptoms, but the root cause/
conflict remains. Over time problems become greater.
6. What can we do to change our reality?
“Insanity: Doing the same thing over and over again and expecting different results.”
—Albert Einstein
The answers to the above-mentioned problems are available. We will now
look at Strategic Learning and the Strategic Fitness process as processes to
bypass these problems.
7. Strategic Learning: Willie Pietersen
Two questions need to be answered. One, what are those few things
organisations must be able to do outstandingly well and two, how can
organisations implement these things in practice?Pietersen proposes a series
of five steps which need to be followed.
7.1) Insight: The ability to make sense of the changing environment
(Situational Analysis).
The purpose of this is to develop superior insights to use as a base for the
firm’s strategic choices. The insights are around customers, competitors, the
firm’s own realities, industry dynamics, the broader environment. The idea is
to challenge assumptions and to search for trends and root causes.
 Customers: What are the underlying trends in our customers’
expectations?
 Competitors: In what distinctive ways are our traditional competitors
serving the market? How does their effectiveness compare with ours in

6. the eyes of the customer? Who are our non-traditional competitors and
what unique benefits do they offer? Who is the most dangerous, and
why?
 The firm’s realities: What are the five-year trends on critical performance
measures and what conclusions can we draw from this? Where are we
making money and where are we not? Are we addressing our losing
propositions? What are our key strengths that we can lever for
competitive advantage? Industry dynamics which trends in our industry
are the most important in shaping our destiny? What are we currently
doing to exploit these developments so that they produce greater value
for our customers? What barriers must we overcome to take the lead in
profitably exploiting these trends? What are the top priorities?
 Broader environment: What is happening around us that will impact on
our business with regard to economic trends, social habits and
attitudes, technology, demographics, government regulation. Situational
Analysis must involve personnel from the overall environment,
especially those closest to the customer, and not just the top. With the
key insights/ trends that have been identified, a list can be made of the
alternatives now facing the company, as well as of the pros and cons.
7.2) Focus: Winning proposition to get customers against competitors
“People think focus means saying yes to the thing you’ve got to focus on.
But that’s not what it means at all. It means saying no to the 100 other good
ideas that there are. You have to pick carefully. I’m actually as proud of
many of the things we haven’t done as the things we have done.”
—Steve Jobs, CEO, Apple
Which customer will we serve and which not, and what products will we
offer them? What will we do differently or better than our competition to
achieve greater value for our customers and superior profits for our firm?
(Winning Proposition)
7.3) Alignment: The ability to align and mobilise the entire organisation
behind this strategic focus.
Effective project management is required to close the gaps identified. The
existing alignment has developed in order to support the previous strategy,
this now needs to be changed. The following elements must work together in
support: measures and rewards, structure and process, people and culture.
 Measurement and rewards: What is the use in trying to introduce a new
set of practices while continuing to measure and reward the old ones?
 Structure and process: In order to support the new strategy, should the
firm be organised by product line, customer grouping, function,
geography, or some other principle?

7.  People: People need to be focussed, skilled and motivated. For focus
we require well-defined and clearly communicated strategic choices. If
the skills required are different, the firm may need to find partners or
acquire an organisation with the skills available. Since we are
compelling people to change, we will run into most of the problem areas
discussed earlier in the e-book.
● Culture: Fixing the culture is the most critical and most difficult part
of corporate transformation. Culture can be thought of as a means to an
end. In a society, culture is a set of beliefs and behaviours that persist
over time because they help that society to solve its challenges. Every
society has an elaborate system of rewards and penalties designed to
ensure that supportive behaviours continue and destructive behaviours
are extinguished.
7.4) Execution: The ability to implement fast (implement and experiment).
Since much of the world is unpredictable and thus difficult to interpret a
deliberate set of experiments should be rolled out for organisational learning.
This step then feeds back into Situational Analysis. This strategy should then
be captured in a short document consisting of the following:
7.5) Renewal: The ability to do these things over and over without stopping.
8. Strategic Alignment: Michael Beer
We need to create an organisational culture where it is okay to admit that
there are certain things we cannot know, no matter how high the intelligence
of the particular individual. The culture needs to be open to dialogue to create
shared meaning and common purpose. During our dialogue we need to bring
to the surface the details of mental models we use. Management traps, as
explained by Argyris, are probably the most serious threat to enacting the
change required for strategy implementation. We get trapped by behaviour
that prevents learning and change – when we most need to learn, we
paradoxically work hardest at shutting down conversations, shutting down
other people, and shutting down ourselves. We tell ourselves and each other,
“Don’t go there,” where ‘there’ is any sensitive issue that might upset the
status quo that envelops us like a cocoon. We have tacitly agreed to rule off
limits and to make undiscussable topics that challenge our accepted sense of
self and our comfortable organisational routines. Having thus agreed to rule off
limits any topics that might help us change and grow, we become trapped in
the status quo.
Since Human nature cannot be changed, management traps will always be
with us. Beer thus proposes the Strategic Fitness Process (SFP) as a way to
circumvent these traps. With the support of a facilitator the SFP is run by the
top executives and representatives from the next level of managers. The

8. representatives are assigned to interview front-line staff on the problems being
experienced with the current strategy. This team then reports back for two
days without the top executives being allowed to deny the existence of what is
being reported. Only questions for greater clarity are allowed. Since
management hears of these issues from their best people, whom they
themselves have selected, and since their own analysis shows the same
problems, the impact is powerful and a mandate for change is created.
A few days later the top executives report back to the representatives with a
plan to address the problems identified by them. Typically, the response is to
highlight defects in the proposals, which can be traumatic for the top team.
The role of the facilitator and CEO is to enable the representatives to get to a
better understanding of the full complexity of the situation and to fine tune the
plan generated.
The following section is a real life story illustrating that the methods proposed
can enable managers to bypass management traps to become successful in a
short period of time.
The Business Unit that Turned Around within Six Months
Many years ago I had a life-changing experience which completely altered my
view of what constitutes good business and management practice. A
manufacturing site for the company I was working for (a few thousand km
away from head office) was about to be closed down due to years of poor
performance. However, the MD decided that the business was a strategic
necessity and one last effort had to be made to save it. The production
manager at the time was snowed under and did not have the time to attend to
this effort. As the least loaded member of the management team and newly
qualified in Managing the Theory of Constraints Way, I was approached. I
would have a maximum of two days a month available on site during which I
would have to try and turn the company around.
Sales had been falling for five years in a row. Lead times were six to seven
weeks but often as long as ten on some items. Customers were desperately
unhappy; their tolerance time was actually less than two weeks. There was no
direct competitor but customers were moving to substitute products. The
company’s own sales personnel found that a substitute product produced in-
house could be sold with much less hassle and recommended this to their
customers.
Signs of financial stress were visible everywhere. Given the chronic poor
financial performance pay levels had stagnated and many personnel were
paid well under the industry standard. Finance applied pressure for lower
scrap (which required fewer changeovers and longer production runs) while
sales screamed for shorter lead times and shorter runs. Because of reducing
sales volumes profits were under pressure and runs were extended to lower
scrap. The production planner had a nervous breakdown trying to schedule

9. these conflicting requirements. Quality standards had been relaxed in order to
use cheaper raw materials. The inevitable thus happened as the product got a
bad name and sales contracted further.
As a result of these problems the rest of the organisation found that any
problem could be blamed on the production facility, the charges would be
believed and attention would be diverted from their contribution to the
problem.
The production staff were despondent and could see no way out of the
problems they were facing. When asked how he felt a production member
said, “I am in a dark room with no light and I do not know where to turn.” They
were caught in the middle of a conflict between sales and financial targets
which seemed insurmountable. Any solution they suggested which favoured
one target over the other was quickly shot down by either sales or finance.
Negative attributes, as mentioned by Argyris, were attributed at head office to
the intention of staff at this facility. They were uncooperative (sales), inefficient
(finance) and as explained in management traps this was never
communicated to staff, but the sentiment was known.
And yet, within a year this facility had turned around, within two years the staff
had the highest morale in the whole of the company. The planner was
unrecognisable from the person he had been before.
How did this happen?
To begin with we had the typical filtering of information through layers to
head office. All were aware of the poor financial performance of the
manufacturing facility, but none understood the root causes. It was known that
pay levels at the facility were below industry norms, but the conclusion was
that the workers thus had to be of a low standard. The simple conclusion: the
financial problems were due to poor quality staff. To my eternal
embarrassment, this was also my view. Advice from many quarters was, “Get
rid of as many underperformers as you can to save the facility.”
After a few visits and discussions with the staff it became clear that the root
cause of the problem was not poor quality staff, as I had believed, but the way
performance was being measured and incentivised. The mental model
regarding the behaviour and needs of customers was also flawed. A full day
per week was spent by the manager in charge scrutinising accounts and trying
to save on expenses, while no attention was given to doing things that would
satisfy the customers. Costs had been cut so far that product quality was
being affected. Trying to run as efficiently as possible resulted in slightly lower
costs, but pushed out lead times and made them unreliable. This distortion
was created by head office, with the best of intentions. The personnel at the
facility were unable to articulate this to head office, and to be honest, even if
they had tried they probably would have hit a brick wall. Explanations under
these circumstances are easily mistaken for excuses. This is a manifestation
of the negative consequences of hierarchy and management traps as
discussed later in this e-book.

10. Not having many years of experience in manufacturing (with the exception
of training in Managing the Theory of Constraints Way) I realised that the
solution would have to come from those working at the unit. My strategy was
to give them purpose (identify an external enemy), to let them challenge the
conventional way of doing business, find their own way of solving problems
(create new mental models), protect them from the short-term consequences
of the change processes, and celebrate every success.
In hindsight it has become clear to me why the turnaround was so
successful. This understanding arrived through the work of Daniel Pink.6)
He
claims that in the modern fast-changing environment companies will only
excel if workers have a Purpose wider than just the business objectives, are
allowed Autonomy in performing their work and are able to achieve Mastery in
their work. At the time my expertise in production was limited and I had to
generate a dialogue with the staff in order to acquire the solutions from them. I
had to practise humility and ask those on the floor for their ideas.
The conditions set out for the creation of a task force in the Strategic
Alignment process was also fulfilled. As a representative from senior
management I was able to get first-hand information on the nature of the
problems on the floor. I also had the autonomy to change processes around.
The Theory of Constraints played a critical role in this implementation. It
addressed the Strategic Learning issues through identifying the customers’
significant needs and enabled the alignment of the organisation with the
customers’ needs through Simplified Drum Buffer Rope (TOC Planning
method) and buffer management (TOC control mechanism). In this way a few
critical leverage points were identified and only these were actively managed.
Since many of the actions required by Theory of Constraints seem counter-
intuitive we spent many hours with middle management discussing the
philosophy, why it would work and highlighting successes.
Once a month a dialogue session was held to ensure that our mental
models on the competitive environment and the direction in which we were
changing our internal processes were still current. In many instances
measurements had to be set up to encourage actions which resulted in higher
level outcomes with a time lag. This is known as managing by means which is
opposed to the traditional method of managing by outcomes.7)
For example,
supervisors were measured on the availability of accurate set-up charts. Once
it became clear that these actions resulted in lower scrap the supervisors took
the responsibility on themselves to ensure set-up charts remained available
and current. This ensured that run to run consistency was achieved.
As a manager my views and philosophy on management were forever
changed by this experience. It is now my firm belief that a group of average
performers, managed according to the principles of Autonomy, Mastery and
Purpose and focussed through the Strategic Learning and Strategic Alignment
processes can outperform a group of top performers every time. The Theory
of Constraints provides a short cut to get results quickly, buys time and lays
the groundwork for full implementation of the latter two processes.

11. 9. Overview
We live in a complex dynamic world which is difficult to understand. All of us
see the world from our own limited perspectives and in terms of mental
models we have put together over the years. Many of these mental models
correspond to outworn best practice paradigms which are not valid for the
changing situation. The information that reaches us through the organisation
has been filtered and averaged, based on the culture of the organisation and
the number of layers it has had to pass through. Even the information we
receive directly from outside sources is interpreted according to confirmation
bias in order to confirm our currently held beliefs.
Management traps show us how difficult it is to get true information to
decision makers. The Strategic Fitness Process has shown us how to be
effective in addressing the flow of information to the top and downwards
again. Human beings are uncomfortable with ambiguity and uncertainty. All of
these issues are discussed in much more detail and with practical examples
and stories in “Drawing a new Map.”
Through following these suggestions may you once again learn to love
what you do so that you never have to work a day in your life again.
References:
1) Argyris, C. (2010). Organizational Traps: Leadership, Culture,
Organizational Design. Oxford: OUP: Kindle edition.
2) Deming, W. E. (1982) Out of the Crisis. Ch 3: Diseases and Obstacles.
3) Deming, W. E. (1982) Out of the Crisis. Ch 3: Diseases and Obstacles.